Time Value of Money 1
Interest: The Price of Money
One of the most fundamental concepts in personal finance is that money has time value. But what does that actually mean in the context of the real world?
Well it’s partially a result of interest, which you’ve likely encountered on your mortgage, car payments, loan or any situation where you used borrowed money to acquire something in the present, instead of letting the money grow and buying it in the future.
Interest in the most common sense, is just the price of cash. It’s the required rate of return that a loaner demands to receive from someone they’re lending capital to.
Why Charge Interest?
Because money has time value! A dollar today could be worth more tomorrow, a loaner could, instead of loaning money out to an average joe, simply invest that money in a government bond and receive a return on their investment! By that logic it only makes sense that we charge interest when loaning money.